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A lottery isn’t the answer to our housing problems

By Joe Cortright

4.10.2016

Every few months, the national prize pool in the multi-state Powerball lottery piles up to tens or even hundreds of millions of dollars. Early this year, three lucky winners split a prize with a total value of $1.6 billion dollars. Bucking odds of about one in 262 million, Marvin and Mae Acosta’s purchase of a Powerball ticket at a Chino Hills, California convenience store changed their lives. Overnight, this couple of modest means became very, very wealthy.

Not a solution to income inequality, either (Flickr: aparadavila)

For the rest of us, it’s a pleasant diversion to daydream about what it must be like to win the lottery. And while it’s an entertaining scenario, given its magnitude, it’s not like anyone is suggesting that the Powerball is a solution to our problems of poverty or inequality. And yet, when it comes to housing, one widely touted policy amounts to holding highly visible lotteries that help a relative handful of people, but really don’t do much to address the problem’s scale.

For many affordable housing advocates, inclusionary zoning is all the rage. The idea behind inclusionary zoning that we can solve our housing affordability problems by requiring developers to build a certain percentage of affordable units as part of any new housing development and then sell or lease them at below-market prices to households with low or moderate incomes.

We and others have pointedout that inclusionary zoning requirements tend to drive up the cost of the market rate units that do get built, because the cost of the affordable units has to be made up somewhere. Additionally, inclusionary zoning requirements tend to reduce the number of new units that get built. This adds to the upward pressure on prices and rents, lowering affordability for those not fortunate enough to land subsidized housing.

But another key problem with inclusionary zoning is scale: The number of affordable units that get built is tiny, compared to the demand for them. From a policy perspective, that means that IZ hardly makes a dent in the size of the affordability problem. And for cities it creates the very practical problem of deciding who, among tens of thousands of potentially eligible low- and moderate-income households, will get one of the coveted affordable units.

Sally French, a reporter for Dow Jones Market Wire, gives a real-world dispatch on this process in “How I bought a condo in San Francisco for $268,000.” French explains how she applied, entered the housing lottery, and was chosen to buy one of a few affordable condominiums available in San Francisco. By her estimate, she paid about one-third the going price for unit. Her story illuminates two key features of the program: how few units are actually available and what it takes to get selected to buy one.

One winner of San Francisco’s housing lottery.

In a good year, San Francisco has about 200 to 300 below market rate units to allocate. But based on the program’s income limits, something like 60 percent of the city’s 350,000 households qualify to participate in the lottery: nearly 200,000 potential applicants, or several hundred per available unit. And that understates the ratio considerably, because people living outside San Francisco can also apply. French was renting a room across the bay in Berkeley when she applied.

Holding a lottery to award deeply discounted condominiums to a lucky few is no more a way to solve our housing problems than encouraging poor people to buy lotto tickets is a viable solution for poverty and inequality. Every week, the state lotteries and the big megabucks turn an infinitesimal fraction of average citizens into newly minted millionaires or multi-millionaires. No one pretends big-prize lotteries reduce inequality. Yet that’s pretty much what cities are doing when they offer up big prizes for token numbers of households.

With the actual lottery, you get the disclaimer that “these are games of chance and should not be played for investment purposes.” The same kind of warning ought to apply to inclusionary zoning and attendant housing lotteries: This is a policy that is more about symbolism than large scale results, and shouldn’t be regarded as a solution to housing affordability.

Its very clear that IZ housing lotteries are too small to meaningfully address the affordability problem. Whether the lottery process actually gets homes to the neediest households is the second question. French’s story makes it clear that you have to have the acumen and tenacity to compile a complex application and supporting documents (three years of tax returns and bank statements) as well as dedicating time to attending the lottery itself and homeownership classes. Little surprise that energetic younger, well-educated applicants, like French, would have a leg up in negotiating the very bureaucratic process. And her co-winners include a teacher, an architect and an urban planner.

Additionally, the program’s eligibility requirements create some perverse incentives. French describes how other applicants have turned down raises or passed up overtime to keep their incomes below the level that would qualify them for lottery housing. As she details how the below-market rent program works, including the trials and tribulations of applying and coping with bureaucracy, and the excitement of becoming a homeowner, it’s hard not to be happy for French. And as envious as we might be, we certainly don’t begrudge her winning; and its very much a public service that she has candidly related her personal story of navigating the lottery. But at the same time, we have to recognize that the process of just applying for an IZ unit leaves dozens or hundreds of equally deserving households with nothing.

The approach to allocating below-market rate housing in San Francisco mirrors the situation with housing vouchers, the nation’s largest program to provide rental assistance for the poor. Of those eligible, fewer than a quarter receive any assistance. It too is effectively a lottery; recipients of vouchers call them “the golden ticket.” This frequently makes housing assistance more like a lottery game than a social service, as when 58,000 people applied for 105 homes in New York, or nearly 300,000 people were placed on the waitlist for a Chicago Housing Authority unit. In contrast, the nation’s homeownership programs are generously funded ($250 billion annually through the tax code) and are automatically and universally available to everyone who qualifies. When affordable housing is so scarce that it has to be allocated to a relatively fortunate few via a lottery, it’s a good indication our policies aren’t up to the challenge. Good luck solving our housing affordability problems with this approach.